Morningstar

General Motors Continues to Overdeliver

We plan to lower our fair value estimate but continue to see excellent upside for GM.

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General Motors Co
(GM)

We think the company still has more room to improve despite a third-quarter record consolidated adjusted-EBIT margin of 8.3%, up 30 basis points year over year, because the company is not done making its operations more efficient. Platform reductions will continue into the next decade and other overhead reductions are still to come with management about $3.7 billion into a $5.5 billion cost reduction plan relative to 2014 levels. Furthermore, GM’s crossover lineup is being redone next year, which is well timed with these vehicles extremely popular due to cheap gas.

We found the third-quarter results to be excellent with good quality of earnings. Revenue increased 10.3% year over year to $42.8 billion, which easily beat consensus as did adjusted EPS of $1.72 versus consensus of $1.45. Favorable year-over-year variances in volume and pricing due to good demand in full-size pickups as well as new offerings such as Malibu, Cruze, and Camaro, and the Cadillac XT5 crossover helped offset a $300 million foreign exchange headwind to earnings ($100 million of which was from Brexit) and a $600 million headwind from materials on new launches. Automotive cash flow for the quarter increased to $3.5 billion from $800 million in the prior year’s quarter. Management’s full-year 2016 adjusted auto cash flow guidance remains about $6 billion and totaled $5.2 billion in the first nine months of the year. Management also expects 2016 EPS at the high end of guidance of $5.50-$6.00, as do we.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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